Zen and the Art of Cutting without Cutting

When is a cut in public spending not a cut – when you can disguise it as an “efficiency saving”.

The first big round of ‘fantasy efficiency savings’ took place before the 2005 general election when the Labour and Conservative parties competed via the Gershon and James reviews – the two aforementioned gentlemen being business-persons (in those days when business could do no wrong) who allegedly ‘reviewed’ the public sector and came up with an impressive set of ‘efficiency’ savings.

The build up to election 2010 will make the previous efficiency FA cup look pretty tame by comparison, as efficiency becomes the crucial crutch to try and tame the public sector finances without being seen to cut ‘front-line’ public services.

These initiatives should be treated with extreme scepticism for several reasons.

First, the biggest way of making real efficiency savings is to make ‘allocative’ efficiency decisions – that is deciding to spend whatever money is available on the things which are most important and have the biggest impact. But governments everywhere find it incredibly difficult to make these ‘strategic’ decisions – even more so during periods of retrenchment as we are now entering.

Second, the next biggest way of making efficiency savings is to invest in new technologies – the way the human species has progressed for the past 10 millenia of so. That is, do what you are doing better through labour saving. The trouble here is complex.

(A), most public services are labour-intensive – the most difficult to make really big productivity gains in. In recent years British governments have claimed to be ‘saving’ at efficiency rates across the labour-intensive public sector that are comparable to, or even better than, the private sector which is on average far less labour-intensive. How realistic is that?

(B), even when you can invest in new technology – it costs. ‘Invest to save’ is something that is burned out of the hearts of finance officials everywhere.

(C), even if you can get the money to invest – look at the record of how well it is actually spent, and weep.

Third is what can be called managerial or operational efficiency savings. These are the ones that are the least productive of real savings, and the most risky. The reasons they are the least effective are obvious – reorganising labour-intensive services can only get you so far. But to the extent they do – through things like “just in time” and “lean production” – they make these systems far more vulnerable to error and even systemic failure. Resilience – to use the modern term – require some built in ‘redundancy’ that equals inefficiency. The more you take inefficiency out, the more you build risk in.

There is one further really big problem – measuring efficiency. In most technical definitions ‘efficiency’ in public services is the ratio between inputs (costs) and outputs. Whilst we can measure costs, measuring outputs is far more tricky – especially as you need to measure not just quantity but quality of outputs.

Over the past few years the current government claims to have made massive ‘efficiency’ savings in the NHS. But at the same time NHS productivity – according to the Office of National Statistics – has fallen. So who is right? The answer, perversely, is that maybe both of them are correct.

If patient throughput – i.e. how fast patients are taken into hospital, treated, and discharged – increases, then it appears NHS efficiency increases. And so at one level it does. But if these patients have to come back into hospital because they have been discharged too early, maybe more than once, the overall efficiency of the whole system (as opposed to one bit of it) may decrease. Not to mention the increase in the suffering of patients. These ‘local’ versus ‘system’ efficiency effects – and their sometimes-negative consequences – are ones the government has largely ignored.

The reality is we are moving into a period where all the main political parties will put forward what are mainly across-the-board “efficiency” programmes which are nothing of the sort. The scale of the savings demanded by the state of the public finances will mean that real, front-line, services will suffer – although they will all try to pretend otherwise. Moreover the probable ‘cheese-cutting’ nature of the savings demanded will mean that the effect of real services will be anything but strategic. History shows us that – certainly in the UK – every time we have had to cut back it has been done with all the finesse of a guillotine. But you can be sure it will be hidden behind the ‘smoke and mirrors’ of so-called efficiency savings.